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I Say Again: Put Your Money Where Your Mouth Is

Here’s an e-mail to a new and very aggressive correspondent.

Mr. B__:

You say that I “practice amateur economics.” My alleged offense is my offering as evidence against the notion that American labor markets are seriously infected with monopsony power Walmart’s recent decision to raise its wages closer to the wages paid by its rivals. “Monopsony power,” you insist, “is present when a firm faces an upward sloping labor supply curve. Just because Walmart starts paying workers more does not mean it faces a horizontal supply of labor.” You conclude that “Walmart’s move is completely consistent [with the reality] that too many corporations in the US wield monopsony power.”

I disagree.

I’m quite familiar, of course, with the textbook geometric analyses of labor markets, including with the definition of monopsony power as consisting in an employer confronting an upward-sloping supply curve of labor. But as helpful as that textbook analysis might be for certain purposes, it’s not reality. It’s a diagram. And it’s a diagram that seems to possess unusual power to mesmerize many who encounter it to commit the fallacy of misplaced concreteness – that is, to mistake the analytical concept for the full reality of which it’s meant to illuminate a part.

Two real-world phenomena in particular are routinely overlooked by those persons who, entranced by the textbook definition, label real-world labor markets as ‘monopsonistic.’ The first of these phenomena is the fact that workers are paid not only wages but also fringe benefits and other attractive job amenities. The second is that competition necessarily occurs through time; it’s not and cannot be instantaneous.

Real-world competition for workers can’t possibly be fully described by the static two-dimensional graphs found in textbooks. And so when in the real world we nevertheless witness America’s largest private employer, Walmart, bringing its wages closer into line with those paid by its rivals by hiking by 17 percent the hourly wages for its new workers – workers who are low-skilled – we are indeed justified in taking this fact as strong evidence against the claim that American labor markets are infected with monopsony power.

From the tone of your e-mail, however, I suspect that you’ll not believe me. So I urge you to do what I urge every other person to do who insists that America’s labor markets are chockablock with monopsony power: Put your money where your mouth is. Start a business. If in fact monopsony power is rampant, you’ll be able to hire workers on the cheap. You’ll make a mint as you help to dissolve the monopsony power that you so detest. Indeed, your starting your own business and employing underpaid workers will do far more to help workers than your writing academic papers, op-eds, and pointed tweets.

But if you refuse to put your money where your mouth is, the only plausible explanation will be either that you don’t really believe that monopsony power is rampant or that you’ve not adequately thought through the implications of your assertions. Either way, unless and until you’re willing to back with your own efforts and money your assertion of the prevalence of monopsony power in labor markets, you’ve no business demanding that government put other people’s effort and money where your mouth is.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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